GOP Tax Bill Opens Area 1002 in ANWR for Drilling

Included in the GOP tax bill is a provision that opens Area 1002 of the Arctic National Wildlife Refuge (ANWR) to oil and gas exploration. It was a relatively quiet conclusion to decades of political fighting over ANWR, and Alaska Senator Lisa Murkowski, a champion of the provision, called it the “single most important step” for energy independence and wealth creation in the country.

Despite the opening, it will still take years before the remote region will become a major source of U.S. oil and gas production given the numerous hurdles. Indeterminate development costs, a protracted legal process, and competition from less expensive oil and gas plays are challenges that could slow large-scale development. Nevertheless, proponents of drilling in ANWR say that the potential of Area 1002 is enormous, and oil from the region will be an important supply source to improve the country’s energy security.

ANWR finally open for business

ANWR has been a hotly debated topic for several decades, with support and opposition split along party lines. Proponents have argued that oil production from the coastal plain in Area 1002 of ANWR would provide multiple benefits, including enhanced energy security, royalties for both Alaska and the U.S. Treasury, job creation, and supply for the struggling Trans-Alaskan pipeline system. Meanwhile, opponents have worried about the effects on the environment.

A 2008 estimate from the EIA said that ANWR could produce between 510,000 barrels per day and 1.45 million barrels per day.

The tax legislation finally broke the logjam that long kept the issue at a stalemate for decades. The legislation includes a provision that allows two lease sales from Area 1002 of ANWR—the first lease sale must occur within four years and the second within seven years.

Past estimates of potential production illustrate ANWR’s importance. A 2008 estimate from the EIA said that ANWR could produce between 510,000 barrels per day (b/d) and 1.45 million barrels per day (mbd). If production levels eventually reached even the lower end of that range, it would be significant for U.S. output, adding to already-robust levels due to shale and the Gulf of Mexico. And ANWR production would support the Trans-Alaskan Pipeline System (TAPS), which is struggling with declining throughput.

What obstacles stand in the way?

Even with the green light from Washington, a number of obstacles remain. For instance, staging a lease sale could take several years, which would include a lengthy environmental impact statement (EIS) for the blocks on offer. If the lease sale is ultimately successful, it will still take even more years before a company drills a new well.

Another issue is the attractiveness of ANWR to the oil and gas industry with oil prices at current levels and questions over resource potential. Until companies establish a presence in ANWR and survey the area, estimates of both the resource potential and the development costs will vary widely. The lone well drilled in ANWR occurred three decades ago, and is shrouded in mystery.

The cost of development will also vary even within ANWR. Barclays analysts note that an oil producer would need to build a pipeline from the well to the Trans-Alaskan Pipeline in order for oil to reach the market, increasing costs for companies wanting to drill there. The U.S. industry is currently attracted to shale plays that have a quick payback period. Since oil prices fell sharply in 2014, capital expenditures on large-scale projects have taken a big hit.

Large potential could lure industry

The obstacles are formidable, but oil companies are likely to still take great interest in ANWR. A 2005 assessment from USGS predicted that about three quarters of the resources could be economic at $40 per barrel (in today’s dollars). “Development breakevens on paper could be as competitive as or better than the most prolific resources being developed today,” Barclays wrote.

“Development breakevens on paper could be as competitive as or better than the most prolific resources being developed today.”

In addition, the U.S. and Alaska offer low “above ground” risk and a stable royalty regime. Barclays says the industry would pay 12.5 to 16.67 percent in royalties in Alaska, which “appears attractive” in an international context.

In the long term, new sources of supply are still needed to keep another price spike from occurring. Even if interest in Area 1002 is tepid now, or even for the next few years, it will likely grow in importance over time, particularly if oil prices rise. The International Energy Agency has repeatedly warned that the severe decline of upstream investment in conventional oil projects since the market downturn in 2014 could sow the seeds of a supply shortage in the future. U.S. shale, the IEA says, will grow considerably for the next decade, but it “cannot increase indefinitely and, when it slows, new projects will need to be ready to keep the market from tightening abruptly.” Analysts say that is when supply from areas such as ANWR will become more important.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.